A private IPO differs from a public IPO in the amount of regulation and scrutiny the companies are subjected to.
In the case of a public IPO, they have to meet the regulations laid down by the SEC. Also, they have to adhere to strict disclosure and financing requirements, which can be cumbersome.
In the case of private IPO, the regulations are greatly reduced. If companies raise capital through Regulation D, then they are exempt from the many financial reporting requirements laid down by the SEC.
What is a private placement and how to issue securities through the private placement route?
This reduced regulation saves companies from spending so much time and effort, and this is why many companies prefer to take this route to raise capital.
However, the downside is that companies cannot raise large amounts of capital because the pool of investors is highly limited.
Another downside is that marketing of these private IPOs may be much more difficult than public IPOs.
This difficulty is because private placements are riskier when compared to publicly traded companies, as the latter are subject to more scrutiny than the former. Moreover, liquidity levels are low with private IPOs as the shares cannot be sold easily when the investor needs money, unlike public IPOs, where the investor can sell his/her shares on the market to get immediate cash.
For these reasons, private IPO is not for everyone.
Rather, it is best used when a company does not need high amounts of capital, and is not willing to go through the long and arduous reporting requirements.